CCMM517

Chapter 1:
Introduction to Accounting

Study unit 1
 TABLE OF CONTENTS
1. Outcomes 15. Elements of financial statements
2. What is accounting used for? 16. Accrual concept
3. Purpose of accounting 17. Going concern
4. Financial results 18. Fundamental qualitative characteristics
5. Financial accounting 19. Enhancing qualitative characteristics
6. Management accounting 20. What to do next?
7. Types of entities 21. Remember…
8. Conceptual framework
9. Accounting framework
10. Statement of financial position
11. Statement of comprehensive
income
12. Equity
13. Statement of changes in equity
14. Explanatory notes
15. Statement of cashflow
 OUTCOMES
• Define accounting
• Define and discuss the following:
– purpose of accounting
– financial result
– financial period
• Define and discuss the users of financial statements
• Name and discuss the domains of accounting
• Name and discuss the different types of entities
• Name the five reports that comprise the financial statements
• Name the five elements of financial statements
• Name and discuss the following:
– the underlying assumption of accounting
– the qualitative characteristics of financial statements
 DEFINITION OF
ACCOUNTING

Identificatio Measuremen
Recording Reporting
n t

Of transactions
PURPOSE OF ACCOUNTING

1. To provide
financial
information
(monetary
4. To users of terms)
2. Regarding
financial economic
statements activities
(to make (resources
financial employed to
create value)
decisions)
3. Of an entity
(independent
economic unit)
 EXTERNAL USERS

Controlling Investor Creditor Customer

interest s s s

Want to know if Determine Can entity pay its Will entity be able
their invested profitability & debts? to deliver
funds have been financial state of goods/services?
appropriately affairs for further
utilised & investments and/or
managed withdrawals

Employee
Community State
s

Need job security with Donations Payment of taxes

regard to remuneration & & levies
career opportunities
 INTERNAL USERS

Top
Employees Dept managers
management

Require Require information Requires

information on a for planning and information to
continuous basis to control make strategic
carry out daily decisions with
duties regard to the
management of
the entity
 DOMAINS OF ACCOUNTING

Financial Management
accounting accounting

Prepare formal financial Prepare financial reports  specific

statements for study by requirements of different depts of an
external users entity (internal users)

External users Internal users

• not directly involved with • employees who require
entity specific information to
perform daily duties and
• desire to study formal FS
make informed decisions
 TYPES OF ENTITIES

Private
Sole trader 1 owner company 1-50 owner(s)

Partnershi Public
2-20 owners Unlimited
p company

Close
Non-profit
corporatio 1-10 owner(s) Unlimited
entity
n
FINANCIAL STATEMENTS

Statement of financial position

Statement of profit or loss and

other comprehensive income

Statement of changes in equity

Notes to the financial

statements

Statement of cash flow

 Statement of financial
position

 Wealth = assets (possessions) less

What is financial
position? liabilities (debts) = Equity
 Assets, liabilities & equity 
financial position

When is financial
position  Position on a specific date
measured?
 Statement of profit or loss
and other comprehensive
income

What is financial  Income (earnings) less expenses

performance?  Profit or loss

When is financial
performance  Performance for a specific period
measured?
 EQUITY – OWNER’S INTEREST
Owner’s interest = equity in the business
 Statement of changes in
equity

Owner’s interest in the business

(equity)

Capital Withdrawal
contributio Profit/loss
s
n
 STATEMENT OF CASH FLOW
Indicates the inflow and outflow of cash during a specific period.
• Examples of the financial statements of a sole trader follow
at the end of the chapter.
 Explanatory notes

Consist of detailed information

 Income
 Expenses
 Equity
 Assets
 Liabilities
 Declaration of
accounting policy
 ELEMENTS OF FIN.
STATEMENTS

Financial Financial
performance position
 CONCEPTUAL FRAMEWORK
Why does the Framework exist?

To:
• limit the differences and diversity between the financial statements of
different entities;
• eliminate undesirable alternatives;
• avoid being too strict;
• achieve reasonable presentation.

• People have different ways of doing things. It would cause confusion if each
business prepared financial statements according to their own preferences.
• Framework was therefore established to provide useful information to users.
ACCOUNTING FRAMEWORK
 Explanatory notes

Consist of detailed information

 Income
 Expenses
 Equity
 Assets
 Liabilities
 Declaration of
accounting policy
 ACCRUAL CONCEPT

Transaction takes place on one date and payment

on a different date  on which date must a
transaction then be recorded?
• Transactions must be recorded when they
occur, not necessarily when cash is
received/paid
• Date on which cash accrues  date of
transaction  must be recorded in accounting
records
 GOING CONCERN

Management makes the decision

Is it a going concern? Prepare FS in accordance

with going concern principle unless liquidate or
discontinue

Not a going concern  measure elements at e.g.

liquidation values (cash values)

Not a going concern  disclose fact, reason,

basis used
 QUALITATIVE
CHARACTERISTICS

FUNDAMENTA
ENHANCING
L

Relevance Comparability

AN Verifiability

D
Faithful Understandability
representation Timeliness
 Fundamental
characteristics

Relevance Faithful
representation

Completeness

Capable of making a
difference in a decision Neutrality

 Nature Free from error

 Materiality  judgment
 Enhancing characteristics

Comparability

Verifiability

Timeliness

Understandabilit
y
 GOING CONCERN

• When preparing financial statements  assume that

entity will continue with activities for the foreseeable
future
• Not a going concern  measure elements @ liquidation
values (cash values)
• Note to this effect must be included in financial
statements
• Liquidation values of assets < actual values due to the
fact that entity is forced to sell its assets
ML CONSULTANTS/TRADERS

STATEMENT OF FINANCIAL POSITION

ON 31 DECEMBER 200Y

200Y 200Y 200X 200X

R’000 R’000 R’000 R’000

Assets

Non-current assets: 68 58

Property, plant and equipment 60 50

Financial assets 8 8

Current assets: 60 49

Inventory 15 12

Trade and other debtors 43 36

Cash and cash equivalents 2 1

Total Assets 128 107

Equity and liabilities

Equity: 101 88

Capital 101 88

Non-current liabilities: 1 2

Interest-bearing loan 1 2

Current liabilities: 26 17

Trade and other creditors 16 15

Short-term loan 2 1

Short-term portion of long-term loans 1 1

Bank overdraft 7 0

Total Equity and Liabilities 128 107

 REMEMBER…

There will be a small e-fundi test on the

contents of this presentation.

An e-mail will be sent out to all students,

detailing as to when the test will open as well
as to when it will close.
 THANK YOU

Do you have any questions?

johanna.manyaapelo@nwu.ac.za